AOL adopts television as model

Oct 14, 2002  •  Post A Comment

The driving logic behind America Online’s effort to revitalize its online content and revenues looks and sounds a lot like television’s guiding mantra: Carve out a niche audience, aggregate related programming and services and then charge supporting advertisers and subscribers premiums.
If there is one thing that industry experts agree on in an intensely competitive media arena it is that widely distributed differentiated product will command higher pricing power: higher costs-per-thousand from advertisers, higher affiliate fees from cable operators, higher access fees from consumers and higher price tags in retail stores.
So that is now the universal tenet guiding media players in every sector-from AOL to NBC, from HBO to Discovery-as they rethink and reshape what they are doing.
At AOL, for instance, that increasingly means getting its 35 million subscriber members used to signing on to specific Web pages or “channels” of targeted information about particular subjects at predictable times of the day. These targeted events and features will be largely promoted on AOL’s welcome screen, at the same time every day or week to assist users in establishing new online habits, not unlike tuning into their favorite weekly TV show.
This is Internet by appointment for targeted audiences, instead of users falling into the medium’s big black hole. It is AOL as a portal (remember those?) or an aggregator of information and services about specific areas of interest or topics. As broadband grows, more of the content will be in TV-like motion.
Paradigm shift
So users on Sunday morning who leisurely flip through their Sunday New York Times travel or careers sections can do the same on AOL Web pages that offer endless links to related information, communication and transactions about the same. Working professionals can get used to checking AOL’s business and finance pages before they leave for the office in the morning the same way they glance at The Wall Street Journal.
Sunday afternoon football fans can get used to signing on to AOL’s sports site for statistical information, chat and play electronic games simultaneously while watching the game of their choice.
The Oct. 15 launch of AOL 8.0 will facilitate some of this new content aggregation, in areas such as news, entertainment and sports. AOL also is trying to attract attention with exclusive member “first peeks” at new books, movies, TV shows, recorded music and electronic games.
By the fourth quarter, AOL plans to sell this “dayparting” of special-interest content and features to advertisers, who might be willing to buy access to specific demographics in much the way they do to TV viewers. Eventually, paid tiers of specialized product and services will follow for subscribers, such as custom travel planning or custom buying services.
It’s also aimed at stemming subscriber losses, as the numbers of new AOL members is growing at less than half than the year-ago rate.
“Our members and our advertisers are looking for consistency much like in television and radio,” said David Lebow, AOL executive VP for programming and strategy, and one of a handful of traditional media executives hired to revitalize AOL.
It’s not that television is the killer application for the Internet, he and other AOL executives explained.
“The part we’re taking from TV is that we’re making it easier for users to find what they want by scheduling these features or their time with them,” Mr. Lebow said.
Once AOL subscribers get comfortable supporting their daily habits and activities with AOL fare, the company will begin to create, package, price and sell advertising and sponsorship for its target content pods in much the same way television does for its demographically targeted programs. It’s a departure from selling advertisers Internet impressions that could begin in the fourth quarter but also needs to be supported by bigger industrywide efforts to devise new systems for defining, measuring and pricing Internet reach and frequency.
This paradigm shift will come none too soon, according to Merrill Lynch analyst Jessica Reif Cohen, who sees AOL’s subscription growth and revenues following the dramatic decline in its online advertising revenues, which could be the service’s undoing.
Defining niches
Although AOL’s broadband service has generated relatively small returns compared with the hefty access fees AOL is required to pay cable operators, an important catalyst could be “the development and acceptance of premium HBO-type” one-of-a-kind services that will generate “substantially higher revenue per household through premium services,” she said, referring to AOL Time Warner’s smartly revived premium pay-TV service.
Some of the services AOL is testing and will be rolling out in early 2003 are a subscription music service, subscription film and video (most likely through AOL Time Warner’s Warner Bros. and New Line studios), family event planning, travel planning and home security. There has been speculation that AOL will go the distance in its efforts, with possible plans to launch a range of its Internet services such as e-mail and chat on interactive television in the United Kingdom using AOL-enabled SkyActive.
This mind shift in online content, advertising and usage is critical to AOL’s financial survival, Ms. Cohen said. Ms. Cohen’s worst-case forecast is that without incremental revenues from a much bolstered broadband effort, AOL’s subscription cash flow could plummet from a current $2.3 billion today to $850 million in 2005.
Our concern is that as AOL advertising hits bottom and begins to recover, AOL’s subscription revenues may be hitting a peak of their own,” Ms. Cohen said.
Of course, there are plenty of weary souls in television who can attest to the lack of guarantees when it comes to target programming. Execution and economy have played havoc with the best-laid plans this year, as cable television’s top-ranked niche networks have struggled for subscriber and ad rate increases.
Niche cable content franchises such as Discovery can break out some of their product on pay tiers. But their biggest threat is a floundering economy, in which consumers do not feel compelled to upgrade or pay for additional services.
“If digital cable growth slows down, then everything slows down,” Josh Bernoff, a Forrester Research analyst, said. Digital cable subscriber levels should hit 20 million by year-end and 24 million in 2003, although that is 20 percent off earlier projections.
General-interest cable and broadcast networks will have a tougher time, as has been witnessed so far by the transformations of Viacom’s TNN and Disney’s Family Channel.
That is where AOL is today. It’s all things to all people. And it is moving swiftly toward segmenting its members and content and services into more valuable pieces for which advertisers and subscribers eventually will pay a premium. However, television has the same charge.
Just last week Morgan Stanley Dean Witter analyst Richard Bilotti sounded the alarm: With advertising now comprising just one-third of the total revenues of media and entertainment companies, more enterprising efforts are needed to differentiate content and services that will command above-average advertising rates, subscription fees and affiliate fees.
Knowing the consumer
It is much easier to develop hit content and services-that generate disproportionate profits relative to upfront investments-if the audience and advertisers are strictly defined. A few true “hits” can lead to full-fledged franchises that can be transformed into recurring revenue streams by becoming the must-have brands.
That is the brass ring media players seek, whether online like AOL, mainstream broadcasting such as NBC, pay cable such as HBO or basic niche cable such as Discovery.
But even as the best of them borrow from each other it is important to recognize a few important factors. Changing consumer and advertiser habits is never easy, but it is not impossible either. The key is catering to their passions. Consumers and advertisers will pay
for content and services they perceive they must have, even in economically strained times.
It is now every targeted media player for himself with more than 55 percent of U.S. homes Internet-connected, and the six broadcast TV networks commanding only 45 percent of the viewers to basic cable’s aggregate 55 percent (with a disproportionate 66 percent of the advertising revenues to basic cable’s collective 34 percent).
With nearly every category of growth slowing or uncertain, and the cost of producing and distributing content ever-rising, the new and traditional media worlds are being reduced to a multirevenue stream niche play.